Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Chapter 2 Basic Cost Terminology • Cost – resource sacrificed to achieve a specific objective • Actual cost – a cost that has occurred • Budgeted cost – a predicted cost • Cost object – anything of interest for which a cost is desired Manufacturing Costs Direct Materials Direct Labor The Product Manufacturing Overhead Further Classification of Labor Costs Idle Time Treated as manufacturing overhead cost Overtime Premium of Factory Workers Treated as manufacturing overhead cost Labor Fringe Benefits Treated as manufacturing overhead or direct labor Nonmanufacturing Costs Marketing and Selling Cost Administrative Cost R&D Costs necessary to get the order and deliver the product. All executive, organizational, and clerical costs. Manufacturing Cost Flows Costs Material Purchases Direct Labor Balance Sheet Inventories Raw Material Work in Process Manufacturing Overhead Finished Goods Selling and Administrative Income Statement Expenses Period Expenses Cost of Goods Sold Selling and Administrative Product Costs Versus Period Costs Product costs include direct materials, direct labor, and manufacturing overhead. Cost of Good Sold Inventory Period costs are not included in product costs. They are expensed on the income statement. Expense Sale Balance Sheet Income Statement Income Statement Balance Sheet Merchandiser Current assets – – – – Cash Receivables Prepaid expenses Merchandise inventory Manufacturer Current Assets Cash Receivables Prepaid Expenses Inventories Raw Materials Work in Process Finished Goods The Income Statement Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers. Merchandising Company Cost of goods sold: Beg. merchandise inventory $ 14,200 + Purchases 234,150 Goods available for sale $ 248,350 - Ending merchandise inventory (12,100) = Cost of goods sold $ 236,250 Manufacturing Company Cost of goods sold: Beg. finished goods inv. + Cost of goods manufactured Goods available for sale - Ending finished goods inventory = Cost of goods sold $ 14,200 234,150 $248,350 (12,100) $236,250 Cost of Goods Manufactured Cellular Products Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2007 (in thousands) Direct Materials: Beginning Inventory, January 1 $ 11,000 Add: Purchases 73,000 Cost of Direct Materials Available for Use 84,000 Less: Ending Inventory, December 31 8,000 Direct Materials Used 76,000 Direct Labor 9,000 Manufacturing Overhead: Indirect Labor 7,000 Supplies 2,000 Heat, Light & Power 5,000 Depreciation - plant building 2,000 Depreciation - plant equipment 3,000 Miscellaneous 1,000 Total Manufacturing Overhead Costs 20,000 Manufacturing costs incurred during 2007 105,000 Add: Beginning WIP, January 1 6,000 Total Manufacturing Costs to account for 111,000 Less: Ending WIP, December 31 7,000 Cost of Goods Manufactured $ 104,000 Calculates the cost of Direct Materials Used Accumulates the three product costs for the current period Adjusts the current period manufacturing costs to account for units actually completed Income Statement Cellular Products Income Statement For the Year Ended December 31, 2007 (in thousands) Revenues Cost of Goods Sold Beginning Finished Goods, January 1 Cost of Goods Manufactured Cost of Goods Available for sale Ending Finished Goods, December 31 Cost of Goods Sold Gross Profit Operating Costs: Marketing, distribution, and customer-service Total operating costs Operating Income $210,000 22,000 104,000 126,000 18,000 108,000 102,000 70,000 70,000 $32,000 Figure carries forward from the Schedule of Cost of Goods Manufactured Period Costs are expensed as incurred Cost Behavior • Variable costs – changes in total in proportion to changes in the related level of activity or volume • Fixed costs – remain unchanged in total regardless of changes in the related level of activity or volume • Costs are fixed or variable only with respect to a specific activity or a given time period Cost Behavior, continued • Variable costs – are constant on a per-unit basis. If a product takes 5 pounds of materials each, it stays the same per unit regardless of one, ten or a thousand units are produced • Fixed costs – change inversely with the level of production. As more units are produced, the same fixed cost is spread over more and more units, reducing the cost per unit Variable Costs $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 Unit Variable Cost Graph Cost per Unit Total Costs Total Variable Cost Graph $20 $15 $10 $5 0 10 20 30 Units Produced (000) 0 10 20 30 Units Produced (000) Units Produced 5,000 10,000 15,000 20,000 25,000 30,000 Total Cost Cost per Unit $ 50,000 $10 100,000 10 150,000 10 200,000 10 250,000 10 300,000 10 Fixed Costs $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 Unit Fixed Cost Graph Cost per Unit Total Costs Total Fixed Cost Graph $1.50 $1.25 $1.00 $.75 $.50 $.25 0 100 200 300 Units Produced (000) 0 100 200 300 Units Produced (000) Units Produced Total Cost Cost per Unit 50,000 $75,000 $1.500 100,000 75,000 .750 150,000 75,000 .500 200,000 75,000 .375 250,000 75,000 .300 300,000 75,000 .250 Types of Fixed Costs Committed Discretionary Long-term, cannot be significantly reduced in the short term. May be altered in the short-term by current managerial decisions Examples Examples Depreciation on Equipment and Real Estate Taxes Advertising and Research and Development A Cost Caveat • Unit costs should be used cautiously. Since unit costs change with a different level of output or volume, it may be more prudent to base decisions on a total dollar basis. – Unit costs that include fixed costs should always reference a given level of output or activity – Unit Costs are also called Average Costs Cost Behavior Patterns Example Bicycles by the Sea incurs variable costs of $52 for each of its bicycles. Bicycles by the Sea also incurs $94,500 in fixed costs per year Use Unit Costs Cautiously What is the unit cost when Bicycles assembles 1,000 bicycles in a year? Use Unit Costs Cautiously Assume that Bicycles management uses a unit cost of $146.50 Management is budgeting costs for different levels of production. What is their budgeted cost for an estimated production of 600 bicycles? 600 × $146.50 = $87,900? Use Unit Costs Cautiously What is their budgeted cost for an estimated production of 3,500 bicycles? 3,500 × $146.50 = $512,750? Direct & Indirect Costs • Direct costs – can be conveniently and economically traced (tracked) to a cost object • Indirect costs – cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner Assigning Costs to Cost Objects • Cost accumulation – a collection of cost data in an organized manner • Cost assignment – a general term that includes associating accumulated costs with a cost object. This includes: – Tracing accumulated costs with a direct relationship to the cost object and – Allocating accumulated costs with an indirect relationship to a cost object BMW: Assigning Costs to a Cost Object Direct or Indirect? Consider a supervisor’s salary in the canning department of Campbell Soup Company. If the cost object is the department, the supervisor’s salary is a direct cost. If the cost object is a can of soup (the “product” of the company), the supervisor’s salary is an indirect cost. Relationships of Types of Costs Direct Variable Fixed Indirect Different Definitions of Costs for Different Applications • Pricing and product-mix decisions – may use a “super” cost approach (comprehensive) • Contracting with government agencies – very specific definitions of cost for “cost plus profit” contracts • Preparing external-use financial statements – GAAP-driven product costs only Additional Cost Terminology • Variable Costs – costs that change in total in relation to some chosen activity or output • Fixed Costs – costs that do not change in total in relation to some chosen activity or output • Mixed Costs – costs that have both fixed and variable components; also called semivariable costs Cost Function La Playa Hotel offers an airline three alternative cost structures to accommodate its crew overnight: 1. $60 per night per room usage y = $60x The slope of the cost function is $60. Cost Function y = Cost $20,000 $15,000 $10,000 $5,000 $0 0 100 200 x = Number of rooms 300 Cost Function 2. $8,000 per month y = $8,000 $8,000 is called a constant or intercept. The slope of the cost function is zero. Cost Function y = Cost $20,000 $15,000 $10,000 $5,000 $0 0 100 200 x = Number of rooms 300 Cost Function 3. $3,000 per month plus $24 per room This is an example of a mixed cost. y = $3,000 + $24x y = a + bx Cost Function y = Cost $20,000 $15,000 $10,000 $5,000 $0 0 100 200 x = Number of rooms 300 The Linear Cost Function y = a + bX The Dependent Variable: The cost that is being predicted The Independent Variable: The cost driver The Intercept: Fixed Costs The slope of the line: variable cost per unit